August 22, 2016

As the Supreme Court recently reminded us in Bullard v. Blue Hills Bank, not all orders in bankruptcy cases are immediately appealable as a matter of right. Only those orders deemed sufficiently “final” may be appealed without leave under 28 U.S.C. § 158(a). In light of the numerous parties and controversies involved in a typical bankruptcy case, determining whether an order is “final” can be complicated affair. Thus, finality in bankruptcy is a “flexible standard” applied to discrete disputes that arise within the larger case. See generally 14 Wright, Miller & Cooper, Federal Practice and Procedure § 3926.2 (collecting examples of final and non-final orders). That flexibility, however, has led to disparate results.

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August 15, 2016

Mortgage lenders and servicers face several regulations in servicing residential mortgages. There are requirements under the Truth in Lending Act (“TILA”), Real Estate Settlement Procedures Act (“RESPA”), the Equal Credit Opportunity Act (“ECOA”), the Fair Debt Collection Practices Act (“FDCPA”), state law, and new regulations implemented by the Consumer Financial Protection Bureau (“CFPB”). Failure to comply with these regulations and laws may give rise to litigation, as well as statutory penalties. In many cases, the mortgage borrower files for bankruptcy. When the mortgage borrower states an intention to surrender the mortgaged property in bankruptcy, non-bankruptcy statutes and regulations often conflict with or at minimum create great uncertainty about the mortgage servicer’s obligations to communicate with these borrowers after discharge. Neither the Supreme Court nor many of the Circuits have provided clarity for mortgage servicers on whether, how, and to what extent they may communicate with a discharged debtor who still

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June 17, 2016

On March 9, 2016, Bankruptcy Judge Shelley Chapman of the Southern District of New York issued her decision on the Debtor’s motion to reject certain contracts in Sabine Oil & Gas Corporation’s Chapter 11 case.[i] The decision, which allowed Sabine to reject “gathering agreements”[ii] between it and two “midstream operators,”[iii] Nordheim Eagle Ford Gathering, LLC and HPIP Gonzales Holdings, LLC, under Section 365(a) of the Bankruptcy Code, sent shockwaves through the midstream energy sector and leveled the playing field for bankrupt production companies. Yet, the case leaves undecided the ultimate question – what midstream contracts are protected as real covenants running with the land? That question may be months, or even years, away from any resolution.[iv] In the interim, energy companies are left with Sabine, which implies producers can renegotiate midstream contracts in a slumping energy market, using the threat of bankruptcy and

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May 3, 2016

There are many tenants that are, shall we say, “problem children.” They pay late, open late, breach, junk up your strip or building, threaten, the works. Sometimes, the landlord finds it easier just to reach a lease termination agreement with such a tenant, with the parties walking away with a mutual release. If the lease is below market, or the landlord is really motivated to move this tenant along, the landlord even provides some “keys money” to terminate the lease.

This normal practice may now be turned on its head. In a recent opinion, the Seventh Circuit ruled that a pre-bankruptcy lease termination was a “transfer” under the Bankruptcy Code. Because it was a “transfer,” if the tenant did not receive “reasonably equivalent value” for the value of the lease (such as where the tenant alleges it was a below market lease, which could have been assigned in bankruptcy for

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September 11, 2015

There has been a relatively recent uptick in plaintiffs’ counsel filing putative class actions in multiple state and federal courts for alleged violations of a debtor’s bankruptcy discharge injunction based upon the debtor’s receipt of post-discharge mortgage-related communications. These claims assert putative class action challenges to post-discharge communications alleged to be attempts at personal collection of the discharged mortgage debt.

Bankruptcy Code Section 524(j) expressly allows a secured creditor with a security interest in the debtor’s principal residence to communicate with the debtor in the ordinary course of business provided the creditor is seeking periodic payments associated with a valid security interest in lieu of pursuing in rem relief to enforce the lien. This section is under-developed in case

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June 23, 2015

On June 1, 2015, the Supreme Court released its opinion in Bank of America, N.A. v. Caulkett, No. 13-1421, 575 U.S. ____ (2015), in which it held that a Chapter 7 debtor may not void a junior mortgage under Section 506(d) of the Bankruptcy Code merely because the debt owed on a senior mortgage exceeds the present value of the property and the creditor’s claim is secured by a lien and allowed under Section 502. For now, this opinion cuts off a Chapter 7 debtor’s ability to “strip off” an underwater junior lien.

In Caulkett, the debtor had two mortgage liens on his home; Bank of America held the junior lien. The amount owed on the senior mortgage exceeded the value of the home, rendering Bank of America’s junior mortgage fully “underwater,” or with no current economic value. Generally, where the value of a creditor’s interest in its collateral is

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November 16, 2014

Lenders are frequently confronted with questionable lender-liability claims not only from borrowers (usually in connection with collection or foreclosure procedures) but also from property managers unable to recover from borrowers. Claims property managers assert directly against lenders include those for breach of oral or written contract, fraud, and unjust enrichment (particularly if the lender has foreclosed its interest in the borrower’s property). Lenders can hedge against the risk of claims by property managers through a variety of methods, both pre- and post-borrower default.

As part of origination (or any subsequent review of the borrower’s property management agreement), the lender should ensure that the property management agreement clearly defines that the property manager can turn solely to the borrower for satisfaction of the property manager’s fees and expenses. Thorough property management agreements will also cap expenses the property manager is allowed to incur absent approval, which can help avoid successful

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Lenders are frequently confronted with questionable lender-liability claims not only from borrowers (usually in connection with collection or foreclosure procedures) but also from property managers unable to recover from borrowers. Claims property managers assert directly against lenders include those for breach of oral or written contract, fraud, and unjust enrichment (particularly if the lender has foreclosed its interest in the borrower’s property). Lenders can hedge against the risk of claims by property managers through a variety of methods, both pre- and post-borrower default.

As part of origination (or any subsequent review of the borrower’s property management agreement), the lender should ensure that the property management agreement clearly defines that the property manager can turn solely to the borrower for satisfaction of the property manager’s fees and expenses. Thorough property management agreements will also cap expenses the property manager is allowed to incur absent approval, which can help avoid successful assertion of contractor liens.

The lender can also obtain a three-party subordination agreement among the lender, borrower and property manager that subordinates the property manager’s rights to those of the lender and allows the lender to, among other things, (i) seize rents immediately upon default, and (ii) terminate the property management agreement and appoint its own property manager. Termination of the property manager and appointment of the lender’s desired property manager is preferred to the lender directing the actions of the borrower’s property manager, as a lender should take care to avoid a direct relationship with the borrower’s property manager.

Post-default, the lender should send a reservation of rights letter that defines the parties’ relationships and limits a property manager’s authority. This is particularly true where a property manager has exceeded the scope of mere management and may have undertaken an ownership role at a property or asserted liens against the property, potentially relying on credit support from a lender for repayment of expenses.

Lenders should also consider seeking a court-appointed receiver to operate the property and act as a buffer. The court can grant a receiver the authority to terminate the existing property manager and appoint a new property manager, often of the lender’s choosing. Because a receiver is cloaked with a certain level of immunity (although acts of gross negligence or wilful misconduct are often excepted), a receivership offers a prudent method through which a lender can eliminate a troublesome property manager. A receivership also offers a lender a trial period during which the lender can examine the performance of a property manager of the lender’s choosing that it may decide to retain following foreclosure or a receivership sale. For example, Bryan Cave has extensive experience in obtaining receivers, as well as drafting and revising property management agreements, all of which can protect a lender before meritless claims are asserted.

In the event that a property manager asserts claims directly against a lender, such claims are commonly derivative of claims properly held by the borrower (the property manager’s principal) and, if based in contract, are often not properly memorialized. For example, among other successfully asserted defenses, Bryan Cave has obtained summary dismissal of property manager’s claims against lenders due to (i) failure to comply with the statute of frauds (which requires certain contracts to be in writing); (ii) lack of privity between the lender and the property manager; and (iii) the property manager’s lack of standing to assert the principal’s claims. Although unpaid property managers will always try to look to a deep pocket for recompense, judicious planning can reduce the risk and merit of any such claims.

The attorneys of Bryan Cave LLP make this site available to you only for the educational purposes of imparting general information and a general understanding of the law. This site does not offer specific legal advice. Your use of this site does not create an attorney-client relationship between you and Bryan Cave LLP or any of its attorneys. Do not use this site as a substitute for specific legal advice from a licensed attorney. Much of the information on this site is based upon preliminary discussions in the absence of definitive advice or policy statements and therefore may change as soon as more definitive advice is available. Please review our full disclaimer.